Comments with the IRS on Proposed Form 1024-A Actually Show Differences in How the IRS Rules Should Work

Comments with the IRS on Proposed Form 1024-A Actually Show Differences in How the IRS Rules Should Work

For earlier coverage, please see:

What? Another post on an obscure tax form? Yup, just because it’s obscure doesn’t mean it isn’t important.

In addition to the substance of the proposed form and what it means (see far below), there’s a much bigger issue at work here:

Should the IRS issue rules designed to capture every possible problem or violation, at a cost of burdening speech by smaller organizations or those without good lawyers? Or should the IRS use modern techniques of computer modeling and analytics to focus on the problem areas and take some of the burdens off the little guys?

The IRS’s deadline for commenting on the proposed Form 1024-A, for organizations that want to get an official IRS determination letter on their section 501(c)(4) status is tomorrow. Other organizations, such as the American Bar Association’s Section on Taxation, have filed generally favorable comments.

PPLI’s Comments on Form 1024-A, in contrast, are generally quite negative about the Form, and more importantly, about the IRS’s approach to the whole issue of Congressional intent and actions responding to its recent processing of applications for exemption for advocacy and small organizations.

The ABA’s comments were prepared under the guidance of Beth Kingsley, my friend, colleague and co-founder of the First Tuesday Lunch Group discussion group. That means I’m generally favorably inclined to her way of seeing things, but we do have some different ways of seeing things, and those are reflected in the differing approaches to this proposed Form. The ABA’s comments (at footnote 6) cited PPLI’s earlier post, but said:

In preparing these comments we considered this suggestion but ultimately did not adopt it. Unlike section 501(c)(3) organizations, section 501(c)(4) organizations seeking tax-exempt status are free to self-declare their tax-exempt status and avoid the burdens of filing an application for recognition of that status. For those organizations that do desire a determination of their section 501(c)(4) status, it is appropriate for the Service to do a review sufficient to determine that the organization meets the requirements for exemption under section 501(c)(4).

Let’s compare the ABA’s comments and PPLI’s to see what this means:

The ABA says, for example, on Page 4 that: “Political campaign activities by section 501(c)(4) social welfare organizations have been the main source of controversy for such organizations in recent years, and are likely a key reason for the passage of section 501(c)(4)-related provisions in the PATH Act and, thus, the separate Form 1024-A application.” That is certainly a popular narrative, backed up by a 2016 letter by the New York State Bar Association asking for regulations on the new IRC section 506.

But it’s certainly different from the legislative history of Section 506 that I read. There was a move by Democrats on the House Ways & Means Committee to require section 501(c)(4) organizations to report whether they intended to engage in political activities, but that failed 11-20 in committee, and it didn’t even come up on the House floor. There’s also language in the Additional Views in the report on H.R. 1295, the bill that became Section 506 in the final PATH Act, about political activities, but nothing came of that.

Wasn’t even a partisan issue in the end. In those Additional Views, Sander Levin, Ranking Member of the Committee on that bill, said: “We support the improvements made by H.R. 1295 for section 501(c)(4) organizations applying to the Internal Revenue Service for tax exemption. However, we believe the bill can do more.” And when H.R. 1295 came to the floor, the Democratic floor manager, Rep. John Lewis, talked about the political activities of 501(c)(4)s, but still said: “I support the improvements the bill makes to the taxpayers’ exempt process for social welfare organizations. … The intent is to provide the agency with certain key information.” So the political activities fight, still going on at the moment, wasn’t actually part of the Section 506 fight in any meaningful way.

Actually the legislative history of the language that sparked the IRS to prepare Form 1024-A was pretty clear. The bill’s sponsor, Rep. George Holding, told the House: “this legislation before us would simplify the review process for the IRS and allow them to better focus their resources on the thousands – thousands, Mr. Speaker – of 501(c)(3) applications which are outstanding and languishing for review.” Rep. Peter Roskam, Chairman of the Oversight Subcommittee overseeing the IRS, said:

[The IRS has] said that they have spent 10,000 hours reviewing 4,000 applications for 501(c)(4) organizations, which sounds sort of interesting. …  that is 10,000 hours of a complete waste of time. That is 10,000 hours from an organization that is saying, Oh, we are just begging for mercy, and we are not able to meet these claims, and we are not able to make these calls. … But my point is this: Representative HOLDING’s concept says, this is a complete waste of time. Let’s clean this up. Let’s free up 10,000 hours so that we can do more with less and reject the IRS notion that the best that they can do is to do less with less.

So what Congress was telling the IRS was that it didn’t want the IRS to spend all that time on voluntary 1024s. Now this is a difficult message to accept for the IRS, and for lots of practitioners who see all the potential troubles that could (and do) come from a less rigorous 1024 application process. After all, why not stop the bad guys from the start? And there is certainly some truth to the IRS’s views on this, since they will likely get blamed if some miscreants go through the process and become public controversies.

But that’s not the world the IRS lives in today. Congress has said pretty clearly that it doesn’t want the IRS to spend its time on these applications. And the IRS’s job is to implement what Congress tells it to do.

Fortunately, the IRS is doing an increasingly-good job of leveraging its resources to minimize the burdens of “front-end” processing. Many people complain loudly about the Form 1023-EZ “self-declaring” application form, but the bottom line, the IRS officials tell us, is that they have to move the paper, and they are getting pretty good job of finding bad guys on the back side through reviews of the annual Form 990 tax returns.

And the point here is that someone has to be looking out for the interests of the little guys. There are probably a lot more tax-exempt organizations out there who cannot afford my legal services, or Beth’s or other law firms’ tax-exempt law specialists. In fact, a large part of any tax-exempt organization lawyer’s practice is picking up the messes when one of these non-represented organizations makes big mistakes.

The ABA’s approach of “it’s voluntary, so we don’t have to worry about the little guys,” simply means that only those who have experienced counsel can get the benefits of a determination letter, such as status retroactive to their creation, assurance for donors of status, and so on.

So why not try the less-burdensome approach? If it doesn’t work, then it will be easy to change tracks, with the evidence well in hand.

Ninth Circuit Tees Up Latest Challenge to Citizens United and McCutcheon

Ninth Circuit Tees Up Latest Challenge to Citizens United and McCutcheon

Last night the U.S. Court of Appeals for the Ninth Circuit issued a divided opinion that sets up the next challenge to the Supreme Court’s decisions in Citizens United and McCutcheon. The Ninth Circuit panel in Lair v. Motl,  upheld Montana’s limits on campaign contributions to state officeholders, rejecting a constitutional challenge that the limits violated the First Amendment. Since Citizens United, the Supreme Court has  held that the Government’s only interest strong enough to overcome the First Amendment’s freedom to speak during political campaigns was preventing quid pro quo corruption. As the Court said in McCutcheon:

 In a series of cases over the past 40 years, we have spelled out how to draw the constitutional line between the permissible goal of avoiding corruption in the political process and the impermissible desire simply to limit political speech. We have said that government regulation may not target the general gratitude a candidate may feel toward those who support him or his allies, or the political access such support may afford. “Ingratiation and access . . . are not corruption.” Citizens United v. Federal Election Comm’n558 U. S. 310, 360 (2010). They embody a central feature of democracy–that constituents support candidates who share their beliefs and interests, and candidates who are elected can be expected to be responsive to those concerns.

Any regulation must instead target what we have called “quid pro quo” corruption or its appearance. See id.,at 359. That Latin phrase captures the notion of a direct exchange of an official act for money. See McCormickv. United States500 U. S. 257, 266 (1991). “The hallmark of corruption is the financial quid pro quo: dollars for political favors.” Federal Election Comm’n v. National Conservative Political Action Comm.470 U. S. 480, 497 (1985). Campaign finance restrictions that pursue other objectives, we have explained, impermissibly inject the Government “into the debate over who should govern.” Bennettsupra, at ___ (slip op., at 25). And those who govern should be the last people to help decide who should govern.

The key question in Lair was what evidence the Government needed to show that quid pro quo corruption was likely to occur; did they need to show that corruption had actually occurred, or that it was imminent, or just likely, or even just possible? The Lair majority said even less was required; to sustain a law governing campaign-related speech against a constitutional challenge, the Government need only show that quid pro quo corruption was just not “illusory,”  or not “implausible.” Slip op., 16. Don’t need actual evidence, just someone declaring in an affidavit that it might happen. Slip op., 17. In Lair, state legislators testified that PACs would make more campaign contributions “when certain special interests know an issue is coming up, because it gets results.” Slip Op., 18. That was enough to show quid pro quo corruption, the panel majority held.

Ninth Circuit Judge Carlos Bea dissented strongly, noting that Supreme Court decisions require more than just some hypothetical corruption threat, that there be some realistic quid pro quo corruption threat.  Slip Op., 37, 38, 41, 42 (Bea, J., dissenting). Judge Bea wrote:

The mere prevention of influence on legislators by contributors is now not a valid important state interest that could justify campaign contribution limits. Citizens United v. FEC, 558 U.S. 310, 359 (2010); see also McCutcheon, 134 S. Ct. at 1441. As such, only the avoidance of corruption or the appearance of corruption remain as a
state interest valid and important enough to limit the free speech rights of contributors exercised through their contributions to their legislators. … To establish this sole valid important state interest defendants here must demonstrate that the existence of actual or apparent quid pro quo corruption is more than “mere
conjecture” and is not “illusory.”

Slip Op. 36-37.

And Judge Bea’s dissent pointed out that all of the examples cited by the panel majority were rejected by the legislators to whom they were targeted. Slip Op., 38-41. Thus, Judge Bea argued, there was no actual threat of quid pro quo corruption, only fears that there might be from what the Supreme Court had repeatedly declared to be legitimate speech (or at least speech that the Court would not allow government to prohibit). Judge Bea concluded:

While it is admittedly difficult at times to distinguish between proscribed corruption and acceptable influence, given the important First Amendment interests at stake when restricting political speech we are obliged to scrutinize carefully whether a valid important state interest exists before upholding the constitutionality of such restrictions. See McCutcheon, 134 S. Ct. at 1451 (“The line between quid pro quo corruption and general influence may seem vague at times, but the distinction must be respected in order to safeguard basic First Amendment rights.”). Although there
is admittedly some common sense to the notion that limiting the amount of money citizens may contribute to political candidates inherently forestalls corruption, because so doing also restricts speech our federal constitution requires a greater
evidentiary showing than made on this record before a state may restrict political speech through campaign contribution limits.

Slip Op., 42-42.

The Lair case was filed by Jim Bopp, a legendary attorney whose cases have included many of those leading to current Supreme Court precedents in this area. Bopp vowed to appeal the Ninth Circuit decision. Bopp told the Associated Press that:

“I’m very disappointed that the majority is not willing to apply the changes in the law that Citizens United has mandated,” that “only quid pro quo corruption can justify contribution limits,” Bopp said Monday. Under this ruling, you can “have your constitutional rights stripped from you because somebody can imagine that someone might do something wrong with those rights.”

So yet another Bopp First Amendment case is teed up for the Supreme Court in coming months. This one may tie together threads left dangling in earlier cases:

  • do the newly-reinvigorated First Amendment protections for campaign expenditures now apply to campaign contributions as well? That would carry on the logic of McCutcheon, which, using the newer definitions of corruption, removed overall limits on some campaign-related expenditures.
  • do the First Amendment protections against limiting campaign expenditures on the basis of the identity of the spender (the real holding of Citizens United) apply to campaign contributions as well? Again, that would simply extend the logic of McCutcheon.
  • Can an “infusion” of campaign funds ever constitute quid pro quo corruption? Both McCutcheon and earlier cases held that they might. If so, where are the lines to be drawn between “legitimate” associational rights and corruption?

Stay tuned.

Breaking: Supreme Court Vacates Problematic Fourth Circuit Opinion Welcoming “Restraint” of Candidate Speech

Breaking: Supreme Court Vacates Problematic Fourth Circuit Opinion Welcoming “Restraint” of Candidate Speech

Oct. 10, 2017. In a one-page Order, the Supreme Court vacated the Fourth Circuit’s opinion in Trump v. Int’l Refugee Assistance Project, No. 16-1436, and sent the case back to the Fourth Circuit with instructions to dismiss as moot the challenge to Executive Order 13,780. The entire text of the Order reads:

     We granted certiorari in this case to resolve a challenge to “the temporary suspension of entry of aliens abroad under Section 2(c) of Executive Order No. 13,780.” Because that provision of the Order “expired by its own terms” on September 24, 2017, the appeal no longer presents a “live case or controversy.” Burke v. Barnes, 479 U. S. 361, 363 (1987). Following our established practice in such cases, the judgment is therefore vacated, and the case is remanded to the United States Court of Appeals for the Fourth Circuit with instructions to dismiss as moot the challenge to Executive Order No. 13,780. United States v. Munsingwear, Inc., 340 U. S. 36, 39 (1950). We express no view on the merits.
Justice Sotomayor dissents from the order vacating the judgment below and would dismiss the writ of certiorari as improvidently granted.

PPLI and the Center for Competitive Politics had filed “friend of the court” briefs in the Supreme Court in Trump v. Int’l Refugee Assistance Project, No. 16-1436. That case, commonly referred to as the “travel ban” cases, considered the President’s power to block certain aliens from entering the United States. The U.S. Court of Appeals for the Fourth Circuit had blocked the Executive Order that imposed the ban, but did so by referring to candidate Donald Trump’s campaign statements. Unfortunately, the Fourth Circuit said:

To the extent that our review chills campaign promises to condemn and exclude entire religious groups, we think that a welcome restraint.

Int’l Refugee Assistance Project, et al. v. Trump, et al., 857 F.3d 554, 600 (4th Cir. 2017), slip op. 68

This “welcome restraint” doctrine conflicts with settled Supreme Court decisions protecting free speech on the campaign trail. For example, in Republican Party of Minn. v. White, 536 U.S. 765, 781 (2002), the Court said “the notion that the special context of electioneering justifies an abridgment of the right to speak out on disputed issues sets our First Amendment jurisprudence on its head.” In Brown v. Hartlage, 456 U. S. 45, 60 (1982), the Court said “It is simply not the function of government to select which issues are worth discussing or debating in the course of a political campaign.”

The two PPLI/CCP briefs first asked the Court to review the case, by granting certiorari, then, without taking a position on the merits, asked the Court to protect the First Amendment rights of candidates and those who want to hear their true opinions, by “vacating” (eliminating) the troublesome Fourth Circuit opinion. For more on these briefs, see the Litigation pages.

In competing letter briefs filed last week, the parties argued over whether the case was moot. The Federal Department of Justice argued that the bans have expired, mooting the case, so the Fourth Circuit’s decision should be vacated. In response, the challengers argued that part of the ban continued so the case should not be mooted, and, in any case, the Court never should have granted certiorari, and so should have dismissed the writ of certiorari as “improvidently granted.” Justice Sotomayor agreed with the challengers, but the rest of the Court did not.

The reference to Munsingwear is significant. The Court often vacates on the basis of mootness without referring to that seminal case. Munsingwear says

The established practice of the Court in dealing with a civil case from a court in the federal system which has become moot while on its way here or pending our decision on the merits is to reverse or vacate the judgment below and remand with a direction to dismiss. [340 U.S. at 39] … As already indicated, it is commonly utilized in precisely this situation to prevent a judgment, unreviewable because of mootness, from spawning any legal consequences. [340 U.S. at 41]

The Supreme Court’s near-unanimous decision ends this portion of the case. Another challenge to the “travel ban” includes a ban on certain refugee admissions, and has not yet been vacated. Some observers predict that as soon as that ban expires, on October 24, the challenge to it will similarly be vacated as moot.

PPLI President Barnaby Zall said of the decision: “We would have preferred a strong statement from the Court reaffirming their traditional respect for vigorous and free campaign speech. But given the high tensions surrounding this case, it’s probably the best practical outcome for the Court to have simply removed the Fourth Circuit’s decision from the books and declared the case moot. That way, no respectable lawyer will cite the Fourth Circuit’s legal mistake to argue for suppressing free speech.”

New TIGTA Report on “Inappropriate” Criteria for Evaluating Exemption Applications

New TIGTA Report on “Inappropriate” Criteria for Evaluating Exemption Applications

The IRS auditors filed into the conference room, led by the computer expert clutching his explanation of how he would “image” the organization’s hard drives (this was many years ago, long before this became routine), followed by several agents who would manage and conduct the audit. I sat on the other side of the table, flanked by my lawyer colleagues, several accountants from a national firm and one very nervous organization official. It was really awkward, with the IRS people looking down and everywhere but at us. This wasn’t my first rodeo; previous audit defenses had been professional encounters,  intense but not personal. This, on the other hand, was downright weird.

After a round of introductions, the first words out of the lead IRS agent were “I want to assure you that the selection of this organization for audit was purely random, just by chance.”

OK, then. Except … we knew for a fact that this wasn’t true. This was an enormous, powerful organization, household name, which the then-sitting President routinely excoriated by name. And, we had several knowledgeable contacts who had confirmed that, while there was no direct Nixonian order to investigate, the White House staff had gotten the word to the right people and the audit began quickly thereafter. It was one of several such audits around that time.

Selective enforcement of the tax laws are not new, including in the area of tax-exempt organizations. News coverage of such enforcement blows up when they become public, then quickly subsides with the “other side” claiming similar past outrages. Earnest law professors and commentators opine that it really isn’t that bad because the IRS has to do its job of finding and punishing miscreants. Indeed, the process was so irksome to IRS staff that after one such incident in which I was mentioned, then-IRS EO Director Marcus Owens called me out of the blue one morning to berate me: “So Barnaby, did someone cut you off in traffic this morning? Do you want us to audit them?” (Rest easy, friends; I didn’t recommend anyone, in part because I took the Metro that morning, and knew he was just venting.)

A later, fruitless congressional investigation was notable for the single question that organizations complaining about unfair IRS audit selection were asked: “Please send the Committee all the information that indicates the IRS improperly selected your organization for audit.” Um, shouldn’t you ask the IRS that question?

So the Lois Lerner-driven investigation of the 2010-13 “Be On the Lookout” IRS scandal landed with explosive force. By planting a question with Celia Roady, a respected EO lawyer, at the May 2013 American Bar Association Exempt Organizations Committee meeting, Lerner tried to get out in front of the Treasury Inspector General for Tax Administration (TIGTA), which was about to issue a report damning her and her staff for using “inappropriate criteria” to evaluate applications for recognition of tax exemption.

Prof. Paul Caron has long cataloged the massive output involved in charges and countercharges in l’affaire Lerner. Litigation is still on-going for that disaster, but courts and Congress have long recognized the management and staff failures that torpedoed what had been a relatively swift and understandable process.

As the U.S. Court of Appeals for the Sixth Circuit recently said:

Among the most serious allegations a federal court can address are that an Executive agency has targeted citizens for mistreatment based on their political views. No citizen—Republican or Democrat, socialist or libertarian—should be targeted or even have to fear being targeted on those grounds. Yet those are the grounds on which the plaintiffs allege they were mistreated by the IRS here. The allegations are substantial: most are drawn from findings made by the Treasury Department’s own Inspector General for Tax Administration. Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called “unnecessary information.”

Predictably, some believe that it’s not really a “scandal” because (take your pick) the President didn’t order it, liberal/progressive groups were also “targeted,” and most of the groups eventually got their approvals/recognition. And others believe the scandal was intentionally suppressed by White House and Dept. of Justice pressure.

Now a new TIGTA report has been issued. This is a very limited report, issued almost entirely in response to claims that the scandal wasn’t just targeted against conservative organizations. Major publications issued headlines: the Washington Post said:  “Liberal groups got IRS scrutiny, too, inspector general suggests.”

And the new report found exactly that. Some of the organizations the IRS scrutinized using “inappropriate” criteria included organizations with “Progressive” in their names, some affiliated with the organization formerly known as the Association of Community Organizations for Reform Now (ACORN), and other liberal-sounding names.

Note, however, that this is not news. The 2015 Senate Committee report noted that:

While most of the potentially political applications that the IRS set aside for
heightened scrutiny were Tea Party and conservative groups, the IRS also flagged
some left-leaning tax-exempt applicants for processing. In order to centralize
these cases for review and processing, names and descriptions of several
left-leaning groups were placed on the BOLO spreadsheet. Some left-leaning
applicants experienced lengthy processing delays and inappropriate and
burdensome requests for information.

In fact, the IRS itself knew this even before the scandal broke. Judy Kindell, a legend in the IRS’s EO office for her expertise on political campaign intervention (IRS-speak for political campaigning), wrote an e-mail to Lerner on July 18, 2012, saying that:

Of the 84 (c)(3) cases, slightly over half appear to be conservative-leaning groups based solely on the name. The remainder do not obviously lean to either side of the political spectrum.

Of the 199 (c)(4) cases,9 approximately ¾ appear to be conservative leaning, while fewer than 10 appear to be liberal/progressive leaning groups based solely on the name.

The Kindell e-mail is reprinted as Appendix IV to the new TIGTA report, on Page 102.

And the new report actually makes things worse for the hard-working media in crucial ways. For example, by expanding, without a full explanation, the scope of its inquiry beyond the specific period of the out-of-control Lerner office scandal, the TIGTA report conflates two very different types of IRS scrutiny.

Warning: technical language ahead.

Although the new report mentions both the IRS’s “Touch-and-Go” (TAG) and “Be On the Look Out” (BOLO) programs, it doesn’t explain the differences between the programs and how one shows the scandal while the other may not. What’s really sad is that the Washington Post’s former “fact-checker” Glenn Kessler sussed this out and published an easy-to-read “Explainer” only a few weeks after Lerner’s planted question sparked the first storm of analysis, but his work was quickly forgotten, including by TIGTA.

There is a difference between a BOLO list and a TAG list (“Touch and Go”). Touch and Go was a standard processing term in many highly-problematic areas. http://www.irs.gov/irm/part7/irm_07-020-006.html. (Note: the Internal Revenue Manual is the internal description of standard procedures and can be relied on in certain tax or legal proceedings.) Real TAG analyses are generally reserved for abusive transactions (many of which involve exempt organizations) and have a very specific chain of command and authority, plus review. Potential terrorism issues, for example, are on TAG reviews. You can imagine the reviews those generate. “Compliance” project reviews are generally not worthy of the full TAG panoply. IRM 7.20.6.1.2.1.

To the extent we even know what they are/were, BOLOs, on the other hand, were a new and unreported (and apparently badly supervised) version of TAG lists that raised many of these issues. Like TAGs, BOLOs use key words in the database to identify possible transactions, but the differences are in the structure, supervision, and probably the choice of terms as being recognized for a particular definition of what the problem is.

Here’s an example of the difference: One of the “conservative” groups mentioned in the new report is for “Border Patrol.” See, pp. 28-31 of the report. Only appeared on the TAG list, not the BOLOs. The reason why organizations dedicated to “Stopping illegal immigrant entry into the U.S.” were listed in 2005 for special scrutiny? Potential “abusive transaction” issues, involving claims by the organization’s current Board members that the former Director had submitted erroneous information to the IRS. Not the name or philosophy or positions at all.

Similarly, the next organization portrayed in the new TIGTA report is “CA Politics.” This is another listing from the TAG, of an organization involved with the 2004 inauguration of the California Lieutenant Governor. Most telling, the organization was reported by the California Franchise Tax Board, a government agency telling the IRS there was a problem with this organization. Not because of “Politics” in its name or its partisan character. Not on the BOLOs.

In other words, TAG reviews are what we expected the IRS to do if there had really been a problem; BOLOs are not. BOLOs are, for want of a better description, rogue TAGs, and no one wanted to grab that leash to bring them under control. THAT is the scandal; not that groups’ applications were scrutinized, but that the process was overwhelmingly one-sided and unrestrained.

There is no IRM entry for BOLO lists, nor will there be, since they were stopped years ago. The liberal groups were mostly on TAGs; the conservatives (and a few unlucky progressive exceptions) were on BOLOs.

So it’s a false equivalence to include them both without an explanation of the differences. It’s even worse to discuss them as though the TAGs were as bad as the BOLOs, as the new TIGTA report seems to do.

This has been a long explanation, but it still doesn’t cover most of what went wrong (and what was wrong) in the Lerner era. This was not a question of whether only conservative organizations were targeted; there’s really never been a question that liberal/progressive organizations were also investigated.

But the fact remains that a far larger number of conservative organizations were targeted under the lawless BOLO process. And the BOLOs were different from the TAGs. The media should not be conflating the two, nor should TIGTA.